Apple will have to pay $38M USD and likely be forced to pay new licensing fees unless it can win its appeal

Apple, Inc. (AAPL) is in hot water over its use of the trademarked name "iPad". In fact, appeals pending, a lawsuit loss has put it at risk of a complete sales ban in the world's largest consumer electronics market -- China.

Chinese holding company Proview International Holdings ltd. (HKG:0334) sold Apple the Chinese market rights to use the trademark for a mere $55K USD in 2006, via an Apple subsidiary IP Application Development. Apple has increasingly turned to using shell companies to sue people and buy patents, a traditional method of the patent troll.

Of course Proview, ostensibly had no idea that it was really dealing with Apple, or that Apple would use the trademark towards a billion dollar product. Of course Apple did exactly that, and today the tablet is a much-coveted piece of electronics in the world's largest nation -- one that some people would (literally) trade a kidney for.

Proview looked to settle with Apple out of court, but Apple's lawyers apparently did not take the company's threats seriously. So Proview called Apple's bluff and sued it in Shenzhen Intermediate People's Court over the trademarks iPAD (China Trademark No. 1682310) and IPAD (China Trademark No. 1590557). Proview sought 10B yuan (RMB) ($1.586B USD) in damages [source].

The iPad 2 launched in China for a whopping 3.688K yuan (RMB) (~$585 USD) for the 16 GB Wi-Fi version [source], $85 USD more than its U.S. retail price. This is actually slightly lower than the even more inflated price points of the first generation model. The iPad has suffered slightly from its incompatibility with local 3G standards. Internationally, the iPad (first gen.) sold 15 million units in 2010. The iPad 2 sold 40 million units in 2011 [1][2][3][4], keeping Apple far ahead of would-be Android tablet competitors.

The iPad is the hottest tablet in China. [Image Source: EPA/Diego Azubel]

The crux of Proview's argument is that it sold the rights to IP Application Development -- not Apple.

Apple argued that Proview was in the wrong and that it fully owned the trademark, via a transfer. It sought 4M yuan (RMB) ($634.5K USD) in legal fees, for what it says was a defense against false claims.

But the local court did not see Apple's logic, ruling it to be in infringement. It is on the verge of ordering a 240M yuan (RMB) ($38.07M USD) fine [source]. Emboldened, Proview has filed more lawsuits against Apple's retail partners, including one that will be heard in court in the Pudong district of Shanghai later this month.

Proview Shenzhen's lawyer Xie Xianghui demands that in addition to paying the fine leveled by the Shenzhen court, Apple must either pay a licensing fee or stop selling the product. And it wants an apology, for what it sees as Apple trampling its IP rights.

States Mr. Xie in the China Daily, "We ask the court to stop selling and marketing for Apple's iPad in China. We also demand an apology."

Xiao Caiyuan, another lawyer, told the China Daily, "We have prepared well for a long-term legal battle."

But Proview may need outside cash from another Chinese firm or venture capitalists in order to fuel a successful IP war against Apple. The holdings company, which owns some display manufacturing capacity in Taiwan, appears to have listed its website for proviewintl.com for sale.

Proview's webpage appears to be for sale -- which could be a sign of cash troubles.

For those who fear the Shenzhen court may be favoring the local firm, consider that Shenzhen is far more reliant monetarily on Apple than on Proview, so the ruling indicates that Proview must have a very strong case.

One thing is for sure -- the Proview case illustrates the danger of firms dealing with holding companies, as you never know who you're dealing with. As an IP firm you would expect that would be something Proview would be aware of, given that IP-heavy firms are among the biggest abusers of shell companies.

As this is an oft-occurring headache in the tech industry, the real question his how to stop shell company obfuscation.

The answer seems simple; just limit the number of subsidiaries that any one corporation can hold. This would go a long way to preventing this kind of potential abuse and reduce these "he-said-she-said" legal spats.